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Leading analysts raise target prices for Constellation shares

03 July 2023 By Ron Emler

Analysts have been getting excited about Constellation Brands’ first-quarter results following the outcry surrounding AB InBev’s best-selling beer, Bud Light. Now two major players have further thrown their weight behind the drinks firm, upping their predicted share prices for the company.

For 21 years Bud Light had been the favourite of Uncle Sam but in June it was hit by backlash in its core market over a social media promotion with transgender influencer Dylan Mulvaney.

Now Mulvaney’s supporters are saying that AB InBev has failed to stand by the influencer during the fall out.

As a result, Constellation’s Modelo Especial dethroned Bud Light as the top selling beer in the US. However, Constellation’s latest figures ran only to the end of May 2023 so the company’s numbers have yet to fully reflect that latest consumer switch in demand for its Mexican-brewed brands.

Even so, the figures underline the irony that AB InBev sold the US market for Modelo to Constellation in 2013 to secure regulatory approval for its acquisition of Grupo Modelo and the right to distribute its brands in the rest of the world.

Since then Constellation has done an excellent marketing job with Modelo, turning it into a high volume, premium-priced offering and making Constellation the largest beer import company in the US.

It has the third-largest market share (7.4%) of all major beer suppliers after AB InBev and Molson Coors.

Modelo has steadily gained market share over the past 10 years and for the month ending 17 June it held 8.4% of US retail beer sales compared with Bud Light’s depressed 7.3%.

The analysts were not disappointed because Constellation’s latest results topped their expectations.

The beer business posted an 11% increase in sales based on the strong growth across the Modelo Especial range and Corona Extra.

They had been enjoying strong impetus far before the Bud Light debacle and Constellation’s net sales in the three months rose more than 6% to US$2.52 billion compared with 2022, beating the analysts’ average estimate of US$2.47 billion.

Chief executive Bill Newlands predicted further beer growth and two prominent analysts, Jefferies and Wedbush, raised their target prices for Constellation’s shares.

Jefferies predicts a target price of US$300, while Wedbush has increased its target to US$270.

Yet the stock fell marginally on results day and is currently trading at about US$246, well below the average target price of $268.83.

Why? Despite its relentless drive to increase prices for the consumer there is some caution about sales momentum as inflation takes its toll on disposable income.

So despite the growing demand for Modelo, Constellation did not increase its annual adjusted profit per share forecast of US$11.70 to US$12.00 as steeper costs dented its beer operating margins by 220 basis points in the quarter.

It continues to face soaring costs of raw materials, freight and packaging as well as rising wages and overhead expenses.

In wines and spirits the company had banked on its “premium-yet-affordable” offerings such as Kim Crawford wine and High West whiskey to push sales at a time when inflation-hit consumers have been tightening their belts.

Newlands said that Meiomi and Kim Crawford, the largest premium wine brands in the portfolio, plus The Prisoner range, had gained market share and outpaced dollar sales growth. However, it was “taking time” to reposition the mainstream wine labels, including Woodbridge, because of the “growth headwinds” facing the segment.

He said the group’s spirits portfolio maintained its market share but with stronger performance across its higher end tequila and RTD offerings.

Mi Campo Tequila and High West RTD cocktails “both delivered significant double-digit sales growth”.

However, Newlands acknowledged that the wine and spirits business “continued to face lower demand”, an admission that puts heavier pressure on the dominant beer section to keep Constellation moving forward as restructuring takes place.

However, he said he was “confident” in the outlook for wines and spirits as performance was expected to improve as the year progresses.

Since it went upmarket in wines, Constellation has enjoyed improved margins and hopes to add to that record through the very recent acquisition of Napa Valley wine brand, Domaine Curry from Coup De Foudre.

Constellation-owned Ruffino has also acquired of 15 hectares of Bolgheri vineyards across two sub regions, with four hectares in Bolgherese and 11 hectares in Sondraie.

But not everything is moving forward at Constellation. It continues to sit on a majority stake in Canopy Growth, the troubled Canadian cannabis producer in which it has sunk more than US$4 billion and where it has already written down a substantial part of that stake.

Today it even accounts internally “ex Canopy”, highlighting the continuing problems.

In addition, Constellation has remained close lipped about why its foray into craft beer over the past decade turned sour, with the quiet resale of brands to their founders at a minimum cost of about US$70 million to Constellation’s shareholders.